Bendigo profits from care and volume

Ian Rogers

Cost-conscious Bendigo MD Marnie Baker

Strategic discipline and cost discipline framed around the most successful fintech spend-up so far in Australian finance has lifted Bendigo and Adelaide Bank back into the good books, at least as ASX valuations condenses things.

Cash earnings of A$220 million for the six months to December at Bendigo are more than double the previous half. The pre-provision profit took a dip, but the crummy returns of six months ago BEN followed witha cash ROE, on Wilson's numbers of 7.4 per cent, 200 bps head and shoulders better than his model had.

A $50 revaaluation on the Homesafe assets nudged the bottom line and the share price.

Having confounded the sell-side banking analysts this time last year over the expense and earnings outlook, and then frustrating many much later in 2020 with the bank finding itself on the wrong-side of APRA - exposed for compliance oversights - the double-digit bounce in the BEN share price yesterday following the release of Bendigo’s first-half financials positions the bank to renew the ‘100 year’ foundations of its (temporarily celebrated) value story.

With Bendigo seen to be no longer keen to buy ME Bank (leaving it to BOQ) BEN’s shares popped by $1.07 or 11 per cent to $10.56 on Monday.

The allied factor in the share price surge was the snap projection that a capital return from a sell-down, JV or similar from the bank’s Homesafe wealth-release mortgage was finally on the cards.

“A strong beat [and] a plump half of earnings” is how the often cynical Evans and Partner bank analyst Matthew Wilson branded the December 2020 BEN half year report.

Bendigo “have worked hard to address costs with simplification, IT investment and right sizing. This is starting to pay dividends,” Wilson brief his clients.

“However, low returns and chunky volume growth of 4.6 per cent will make the 60 per cent to 80 per cent target dividend pay-out challenging without additional ongoing capital action,” he said.

S&P Global Ratings said the bank’s earnings “recovered from the prior hit of elevated credit loss provisioning, thus supporting its decision to resume dividend payments.

“Over the past six months, BEN has demonstrated a willingness and ability to compete on price without hurting its net interest margin or earnings due to the positive impact from deposit repricing and lower operating and credit costs.”

While paying dividends at levels the bank is reaping dividends from its drive to think more like and do business more like the fintech it has long since left for dust.

Up, Bendigo’s pioneering offer “is leading the Neobank movement” the bank asserted in the investor pack yesterday, and why wouldn’t they.

Up now boasts 325,000 customers, 12-month growth of 100 per cent and “over 90 per cent ‘new to bank’.”

Deposits under the Up brand stood at $700 million, still almost nothing in the context of a $50 billion retail deposit book and a function of the 16 to 25 year old cohort cheering this fintech brand toward pop-culture icon.

Upsiders, to use bank lingo, opened one million accounts over the half.

Payments volume via the not-as-slick-as-it-was Up app was $3.45 billion over the half, with $840 million classed as “purchases”.

On the asset side, Bendigo is said its partnership with mortgage funding fintech Tic.Toc “is delivering.”

Tic.Toc accounts for more than $1 billion in BEN home loans, also modest, though approvals took off over the half, up 61 per cent.

While originating loans for the bank for as little as two years, Bendigo pointed to the “improved arrears profile on platform originated loans”, which at 0.17 per cent are half the average across the bank.

“We grew in all our key priority markets, which combined with effective cost management to result in positive cash earnings across all divisions,” the CEO, Marnie Baker.

Overall the bank’s consumer division has tons of momentum, with residential lending growing 14 percent or 3.6 times system, “further strengthened by a 26 per cent increase in applications on the prior half,” Baker said.

The bank said it “will continue to target above system residential lending growth”, and for once this does not read like boilerplate.

On the cost side, Bendigo briefed the market the target for FY21 operating expenses will be “flat to slightly down” on FY20 costs a shade over $1 billion.

This includes an “accelerated investment spend” of $35 million.

The bank will a dividend of 28 cents per share which includes 4.5 cents per share relating to the full year 2020 final dividend and 23.5 cents per share relating to the interim 2021 dividend.

A fully underwritten Dividend Reinvestment Plan is in place, with a 1.5 per cent discount.